What is the max home I can afford? (San Jose, Sunnyvale: best neighborhood, real estate)

[frugaltechie]

We are a 2 income no kid household and renting at 1bd/1ba for $2250/month in Santa Clara. I am looking at townhomes and SFHs but they are all at $750k for a 3bd/2ba in good areas or recent constructions. Monthly HOAs are now in the $350+ ballpark. We both work in Santa Clara and wish to live around here in Sunnyvale, W San Jose, Santa Clara, San Jose (Rivermark), etc.

But my question is this: How much home can I afford safely? I make about $110k and my spouse makes $75k but we dont want to stretch the mortgage to hurt us in all other expenses. Not much in stocks or bonuses, and anyway I dont even wish to consider those when they are not guaranteed. Also, we max out 401k and feel safe having a big safety net of savings.

A couple of realtors and banks I spoke to qualified me for a $1M loan! Ridiculous! These are the guys causing the next the bubble burst!

I know everyone's situation is different but any words of advice/suggestions?

[nagleepark]

You should buy one of those $750K town homes or SFHs. Yes, you can afford up to $1M if you want. Avoid HOAs and associated HOA fees if you can but, if you do have significant HOA fees, you might want to limit yourself to $900K on price.

If you buy in a good area, it will be a better investment compared to buying new construction (or, to a lesser extent, recent construction).

Your desire to minimize your financial exposure is understandable but incompatible with your desires to live in a good place in a good neighborhood. Good places in good neighborhoods cost lots of money so, at least initially, you can't expect to max out your 401(k), have a huge safety net and pay your mortgage with whatever is left over.

I advise you to buy something that is a little more than you can comfortably afford and, as time goes on, it'll become comfortably affordable as your salaries creep up, you refinance, etc. If you buy something cheap, you may find yourself stuck with a too easily affordable home but balking at the price of upgrading to a better home.

[vadaseri]

Originally Posted by frugaltechie

A couple of realtors and banks I spoke to qualified me for a $1M loan! Ridiculous!

Your don't trust those realtors and banks but want an opinion from strangers?

Your household income is $185K which will easily qualify for $1M house which means your loan will be $800K. For the areas you mentioned, $750K for 3/2 SFH is cheap. Go for it and buy it before you start a family. You won't regret it. To save school tuition, buy in West San Jose abutting Cupertino.

[neutrino78x]

Please make sure you ate calculating hire much home you can afford based on your take home pay, after taxes and other deductions. Your payment fir housing should be less than 30% of your take home pay. If you put that phrase “how much home can I afford" into a search engine you will get several online calculators.

[jk88cal]

frugaltechie,

You already have the answer on what you can afford from loan officer. Your question is really how much you are willing (or comfortable or confident) to afford. My advice is that you should buy the maximum allowable, assuming your finances back that up. And it should if the loan officer ran the right numbers and you qualified. As first time buyer, your finances will be stretched. It can be financially uncomfortable at the beginning, but it will get easier.

This is how I would go about thinking about this. Case (1) $750k house vs Case (2) $1M house.

- What will happen if one or both of you lose your job. With your cash reserves, stocks, 401k loan, etc, how long can you last in case (1) vs (2). You will have x months to get a new job, otherwise you will be trouble. I suspect you will find that it is probably not much different between the 2 cases; buying case (1) is not any "safer" than case (2). This is your worst case scenario and you have to be willing to accept this.

- Understand whether you are downpayment limited vs monthly income limited for case (2).
-- If you are downpayment limited, I see less issue with this, as your should be able to save up. You will be out of cash reserves immediately. Must maintain your income stream and save up. Note that your future income is probably factors more than what you have saved.
-- On the other hand, if you are monthly income limited, then it is more difficult. But realize that banks calculation is "conservative" (everything is relative). In general, banks allow 40% of your pre-tax income to be used for monthly liabilities: PITI (principle, interest, tax, insurance) + other loans payments. It all depends on your priority, sacrifice, and life style. If your priority is on the house, you will survive and still save quite a bit with this ratio.

- Mortgage payment never increases (assuming you get fixed rate loans and do not have to refi), but your income will increase, whether it is due to advancement, years of experience, or inflation and cost of living adjustment. So after 3, 5, 10 years, the mortgage payment gets easier over time and you are able to save more.

- If you buy in highly desirable area, house value will appreciate faster than average person's income. I know this seems impossible and how can this be sustained. But reality is that there are many buyers out there who can afford and want the property in highly desirable area. That will push the house price up faster than income growth. This doesn't mean every house is a great buy or real estate can be easy quick turn investment vehicle.

- Based on the areas you stated, if I can provide my generalized comment. I would not put Santa Clara, Rivermark, or North San Jose in desirable area. West San Jose (Leland High) and then parts of Sunnyvale (Cupertino elementary and Homestead high) are in highly desired area. Unfortunately, $1M won't buy a decent SFH in highly desirable area; probably not even a tear down. Your money will go further with TH. However, my take is that SFH is better investment. The price is mainly in land (location) and that is what appreciates; the house itself doesn't appreciate. In other words, I would rather buy the crappiest SFH in best neighborhood, vs new construction or TH in average area.

Just to give you an example from personal experience. 12 years ago, a 1100 sq ft house in Cupertino (Monta Vista High) is same price as brand new 2400 sq ft house in south San Jose. Now 12 years later, Cupertino house appreciated 60-80%; the house in south San Jose gone up 20-30%. If I had a time machine ...

Good luck.

[neutrino78x]

Hard to type correctly using this web site on a mobile device...

[mysticaltyger]

I'd say no more than 3X your gross income, so a mortgage no larger than 555K.

[mysticaltyger]

Originally Posted by nagleepark

Your desire to minimize your financial exposure is understandable but incompatible with your desires to live in a good place in a good neighborhood. Good places in good neighborhoods cost lots of money so, at least initially, you can't expect to max out your 401(k), have a huge safety net and pay your mortgage with whatever is left over.

I advise you to buy something that is a little more than you can comfortably afford and, as time goes on, it'll become comfortably affordable as your salaries creep up, you refinance, etc. If you buy something cheap, you may find yourself stuck with a too easily affordable home but balking at the price of upgrading to a better home.

I agree completely with paragraph #!. But I would advise the exact opposite...Skimp on housing in favor of larger safety net/retirement savings/investments.

It really depends on if you want to have kids or not. Kids tilt the balance in favor of the more expensive house. But if it were me, I would never raise kids in SV....too much of a rat race with 2 people working full time to raise kids. If no kids desired, skimp on housing, maybe even continue renting, and save the difference. You can be financially independent pretty quickly on those salaries if you really want to be.

But these are my values and everyone is different. Most people opt for the rat race, unfortunately.

[frugaltechie]

Thanks folks for your long and details answers. This is the kind of argument I wanted to hear. A $1M home costs exactly $5000 a month PITI (4% interest, 1.25% property tax, home insurance, etc). This is excluding maintenance and furnishing and the increased utilities, gardener/lawns, etc.

Our takehome pay (@175k per annum) is about $7800 after all taxes, deduction, etc. If I invest $5000 per month on the house (agreed, there is a saving the mortgage interest tax deduction and it will end up to be about $4200 pm), isnt that too large for a home? This leaves about $3500pm for ALL other expenses.

When we have a kid in a year, the costs are going to increase and squeeze the budget. We currently have older used cars which are fine but they will need replacing in in the near future (1-2 years) if we have a baby.

Please bear with me; I am trying to put myself in others' shoes and see how they manage with $1M houses.
(One colleague says that he bought a house taking into account his salary+bonus+unvested stock and would have a critical problem if there was a downturn!)

[skris4]

I have only one suggestion and that is to keep in mind that your decision should not be short term. The average American lives in a home for close to 7 years.
Our take home pay is about $2500 more per month than yours and we bought a home 2 months back (not a $1M house). Our home is in a good school district(trending better every year) for elementary school so that in another 7-10 years we can 'upgrade' to another house if needed. However there is no hurry since our child will be attending public school until then.

A friend of ours just bought a home for about 650K in a decent neighborhood but not a school district. They don't have a kid and plan to have one in a few years and I know they are planning to spend at least 6-8 years in the current home.